Tests using the Capital Asset Pricing Model show that, in six of nine five-year periods between 1936 and 1979, the portfolio composed of the bottom fifth of all stocks on the New York Stock Exchange in terms of market value outperformed the portfolio composed of the largest capitalization stocks, even after adjusting for risk. For the period 1951 to 1979, the “small firm” portfolio had a cumulative abnormal return of 20.65 per cent, versus 1.53 per cent for the portfolio of large firms.

These results may be taken as evidence that small capitalization stocks yield higher returns than large capitalization stocks. But a more realistic conclusion may be that the Capital Asset Pricing Model, upon which the results are based, is misspecified. If the opportunity cost of obtaining information about small capitalization stocks were included in the purchase price of the stock, the abnormal return would probably disappear.